2019 (9) TMI 146 - AT - Income Tax

Addition u/s 68 - undisclosed cash credit - creditworthiness of share applicants - HELD THAT - All the lender companies are (i) income tax assessee s, (ii) they are filing their return of income, (iii) confirmations available on record, (iv) the loan was made by account payee cheques, (v) the details of the bank accounts belonging to the lenders and their bank statements, (vi) in none of the transactions the AO found deposit in cash before issuing cheques to the assessee , (vii) the lenders are having substantial creditworthiness which is represented by a capital and reserve as noted above. In the instant case, the credit is in the form of receipt of loan from lending companies. The nature of receipt towards loan is seen from the entries passed in the respective balance sheets of the companies as loan to assessee firm. In respect of source of credit, the assessee has to prove the three necessary ingredients i.e. identity of lenders, genuineness of transactions and creditworthiness of lenders. For proving the identity of lenders, the assessee furnished the name, address, PAN of lender companies together with the copies of balance sheets and Income Tax Returns. With regard to the creditworthiness of share applicants, as we noted supra, these Companies are having capital in several crores of rupees and the investment made in the appellant company is only a small part of their capital. These transactions are also duly reflected in the balance sheets of the lenders, so creditworthiness is proved. It will be evident from the paper book that the appellant has even demonstrated the source of money deposited into their bank accounts which in turn has been used by them to lend it to the assessee firm as loan. Hence the source of source of source is proved by the assessee in the instant case though the same is not required to be done by the assessee as per law as it stood/ applicable in this assessment year. The lending companies have confirmed about the loan in response to the notice u/s 133(6) of the Act and have also confirmed the payments which are duly corroborated with their respective bank statements and all the payments are by account payee cheques. Assessee had discharged its onus to prove the identity, creditworthiness and genuineness of the lender companies, thereafter the onus shifted to AO to disprove the documents furnished by assessee and it cannot be brushed aside by the AO to draw adverse view which action cannot be countenanced. In the absence of any investigation, much less gathering of evidence by the AO, we hold that an addition cannot be sustained merely based on inferences drawn by circumstance. - Decided in favour of assessee

Summary

Issues Involved:
1. Partly confirming the addition of ?88,99,899/- from the loan of ?1,10,00,000/- taken from Diamond Carbon Pvt. Ltd.
2. Partly confirming the addition of ?2,06,08,437/- from the loan of ?2,50,00,000/- taken from Wimper Trading and Distributors Pvt. Ltd.
3. Partly confirming the addition of ?3,41,16,137/- from the loan of ?7,05,00,000/- taken from Mukherjee Firms Pvt. Ltd.
4. Partly confirming the addition of ?22,25,276/- from the loan of ?1,20,00,000/- taken from Mukherjee Capital Pvt. Ltd.
5. Confirming part of the additions on presumptions regarding capital and reserves of shareholders.
6. Non-adjudication of the applicability of section 2(22)(e) by the Ld. CIT(A).

Issue-wise Detailed Analysis:

1. Partly Confirming the Addition from Diamond Carbon Pvt. Ltd.:
The Ld. CIT(A) held that the assessee failed to prove the creditworthiness and genuineness of the loan transaction. Out of the total loan of ?1,10,00,000/-, an amount of ?21,00,101/- was deemed to be explained from business reserves, while ?88,99,899/- was treated as unexplained, sourced from unexplained share capital and share premium.

2. Partly Confirming the Addition from Wimper Trading and Distributors Pvt. Ltd.:
The Ld. CIT(A) found that M/s. Wimper Trading and Distributors Pvt. Ltd. had business reserves of ?43,91,563/-, which explained part of the loan. However, the remaining ?2,06,08,437/- was considered unexplained, funded by dubious share capital.

3. Partly Confirming the Addition from Mukherjee Firms Pvt. Ltd.:
The Ld. CIT(A) noted that M/s. Mukherjee Firms Pvt. Ltd. had business surplus of ?3,03,83,863/- and an opening balance of ?60,00,000/-, explaining ?3,63,83,863/- of the loan. The remaining ?3,41,16,137/- was treated as unexplained, sourced from dubious share capital and share premium.

4. Partly Confirming the Addition from Mukherjee Capital Pvt. Ltd.:
The Ld. CIT(A) observed that M/s. Mukherjee Capital Pvt. Ltd. had business surplus of ?97,74,724/-, explaining part of the loan. The remaining ?22,25,276/- was considered unexplained, funded by dubious share capital and share premium.

5. Confirming Part of the Additions on Presumptions:
The Ld. CIT(A) confirmed part of the additions based on the presumption that the capital and reserves of the shareholders were old and had been routed through various investments and fixed deposits, which were later given as interest-bearing loans to the assessee.

6. Non-adjudication of the Applicability of Section 2(22)(e):
The Ld. CIT(A) did not explicitly adjudicate the applicability of section 2(22)(e), although the submissions of the assessee implied that it was not applicable.

Tribunal's Findings:

On the Additions Confirmed by Ld. CIT(A):
The Tribunal held that the assessee had discharged its onus under section 68 by proving the identity, creditworthiness, and genuineness of the lender companies and the loan transactions. The Tribunal noted that the AO had accepted the interest outgoing to the four lender companies, which supported the assessee's claim. The Tribunal also highlighted that the lender companies were income tax assessees, had filed their returns, and had substantial capital and reserves.

On Judicial Precedents:
The Tribunal referred to several judicial precedents, including the Supreme Court and various High Courts, which emphasized that once the assessee proves the identity, creditworthiness, and genuineness of the transactions, the onus shifts to the AO to disprove the same. The Tribunal found that the AO had not conducted any investigation to disprove the documents furnished by the assessee.

On Section 68:
The Tribunal reiterated that section 68 requires the assessee to explain the nature and source of any sum found credited in its books. In this case, the assessee had provided sufficient evidence to explain the nature and source of the loans received. The Tribunal concluded that the addition made by the AO was based on conjectures and surmises and could not be justified.

Conclusion:
The Tribunal upheld the order of the Ld. CIT(A) giving partial relief to the assessee but directed the deletion of the remaining addition of ?6,58,49,749/-. The Tribunal allowed the appeal of the assessee, directing the Ld. CIT(A) to adjudicate the ground related to section 2(22)(e) in accordance with the law after hearing the assessee.

Order:
The appeal of the assessee was partly allowed for statistical purposes. The order was pronounced in the open court on 21st August 2019.